in the united states bankruptcy court for the …omnimgt.com/cmsvol2/pub_47331/728111_155.pdf2...

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re: HEXION HOLDINGS LLC, et al.,1 Debtors.

x : : : : : : : : x

Chapter 11 Case No. 19-10684 (KG) Jointly Administered Objection Deadline: April 24, 2019 at 4:00 p.m. (ET) Hearing Date: May 1, 2019 at 2:00 p.m. (ET)

DEBTORS’ MOTION FOR ENTRY OF

AN ORDER APPROVING THE KEY EMPLOYEE RETENTION PROGRAM Hexion Holdings LLC (“Hexion”) and its affiliated debtors and debtors in

possession (collectively, the “Debtors”) respectfully submit this motion for the entry of an order,

substantially in the form attached as Exhibit A (the “Proposed Order”), pursuant to sections 105,

363(b) and 503(c) of title 11 of the United States Code (the “Bankruptcy Code”), and rule 6004

of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), approving a key

employee retention program for thirty three (33) key non-insider employees and authorizing the

payments contemplated thereunder.

In support of this motion, the Debtors submit the Declaration of John Dempsey in

Support of Debtors’ Motion for Entry of an Order Approving the Key Employee Retention

Program attached hereto as Exhibit B (the “Dempsey Declaration”)2 and respectfully represent:

1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are Hexion Holdings LLC (6842); Hexion LLC (8090); Hexion Inc. (1250); Lawter International Inc. (0818); Hexion CI Holding Company (China) LLC (7441); Hexion Nimbus Inc. (4409); Hexion Nimbus Asset Holdings LLC (4409); Hexion Deer Park LLC (8302); Hexion VAD LLC (6340); Hexion 2 U.S. Finance Corp. (2643); Hexion HSM Holdings LLC (7131); Hexion Investments Inc. (0359); Hexion International Inc. (3048); North American Sugar Industries Incorporated (9735); Cuban-American Mercantile Corporation (9734); The West India Company (2288); NL Coop Holdings LLC (0696); and Hexion Nova Scotia Finance, ULC (N/A). The address of the Debtors’ corporate headquarters is 180 East Broad Street, Columbus, Ohio 43215. 2 The Debtors reserve the right to file additional declarations and/or to use live testimony in support of this motion.

Case 19-10684-KG Doc 155 Filed 04/10/19 Page 1 of 19

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JURISDICTION AND VENUE

1. This Court has jurisdiction to consider this motion under 28 U.S.C. §§ 157

and 1334 and the Amended Standing Order of Reference from the United States District Court for

the District of Delaware dated as of February 29, 2012. This is a core proceeding pursuant to

28 U.S.C. § 157(b), and, under Rule 9013-1(f) of the of the Local Rules of Bankruptcy Practice

and Procedure of the United States Bankruptcy Court for the District of Delaware, the Debtors

consent to the entry of a final order by the Court in connection with this motion to the extent that

it is later determined that the Court, absent consent of the parties, cannot enter final orders or

judgments in connection herewith consistent with Article III of the United States Constitution.

Venue of these cases and this motion in this district is proper under 28 U.S.C. §§ 1408 and 1409.

The statutory and legal predicates for the relief requested herein are sections 105, 363(b) and

503(c) of the Bankruptcy Code and Bankruptcy Rule 6004.

BACKGROUND

2. On April 1, 2019 (the “Petition Date”), each of the Debtors commenced a

voluntary case under chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court

for the District of Delaware. The Debtors are authorized to operate their business and manage

their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy

Code. On April 10, 2019, the Office of the United States Trustee for the District of Delaware (the

“U.S. Trustee”) appointed the Official Committee of Unsecured Creditors (the “Creditors

Committee”).

3. Additional information about the Debtors’ business, capital structure, and

the events leading up to the Petition Date are set forth in the George F. Knight’s Declaration in


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Support of the Debtors’ Chapter 11 Petitions and First Day Pleadings (the “Knight Declaration)

[Docket No. 3].3

RELIEF REQUESTED

4. By this motion, pursuant to sections 363 and 503(c) of the Bankruptcy Code

and Bankruptcy Rule 6004, the Debtors request entry of the Proposed Order approving the key

employee retention program as further described below (the “KERP”), for thirty three (33) key

non-insider employees and authorizing the payments contemplated thereunder. The payments

sought to be made thereunder do not include any payment to an “insider” (as that term is defined

in section 101(31) of the Bankruptcy Code).

BASIS FOR RELIEF REQUESTED

I. FACTS SPECIFIC TO RELIEF REQUESTED

A. Selection of The Debtors’ Key Employees

5. The Debtors’ employees are truly critical to the success of the chapter 11

process, as the Debtors require their continued service to maintain going-concern value during

these cases. In support of the Debtors’ reorganization, employees will undertake laborious efforts

throughout these cases, including, among other things, processing substantial amounts of

information in connection with the Debtors’ postpetition financing, debt and equity capital raises

to be completed upon emergence from chapter 11, disclosure requirements, and chapter 11 plan

workstreams. In addition, the employees must engage in significant and time-consuming

discussions with the Debtors’ customers, vendors, and other constituents regarding these cases and

their restructuring. These efforts, of course, are in addition to the employees’ normal day-to-day

tasks.

3 Capitalized terms used but not defined in this motion have the meanings used in the Knight Declaration.


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6. Due to this increased workload and the significant pressures and uncertainty

surrounding the Debtors’ business at this time, the Debtors are concerned about their ability to

retain their employees, especially those that are highly skilled and therefore most competitive in

the market. Further, many of the KERP Participants are in roles and possess skills that are of a

general corporate nature and are easily translatable to other industries. To address this concern,

the Debtors have crafted the KERP in an attempt to motivate selected key employees to remain

with the Debtors through their restructuring. The Debtors submit that the payments made under

the KERP (the “Retention Bonuses”) are necessary to ensure that these key employees remain

with the Debtors and focus their efforts on maximizing estate value, ultimately enabling the

Debtors to reorganize successfully.

7. In consultation with their advisors, the Debtors identified thirty three (33)

employees (the “KERP Participants”) whose institutional knowledge and skills are essential to

maximizing the value of the Debtors’ estates during these chapter 11 cases. KERP Participants

were selected based criteria such as: (a) role criticality, (b) anticipated difficulty to backfill the

role, (c) individual criticality, (d) risk of attrition, and (e) performance rating. Dempsey

Declaration, ¶ 11. The current KERP Participants consist of U.S. associates between the

Supervisor and Senior Vice President levels. Additional information about the KERP Participants

is as follows:

Average salary: $197,774

Average tenure: 12 years

Representative job levels: Supervisor, Manager, Senior Manager, Director, Senior Director, Vice President, and Senior Vice President

The Debtors also seek authority to add other employees to the KERP, whether in place of any

KERP Participants who may be terminated or resign or in light of new developments or needs as


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the Debtors proceed through these cases (the “Additional KERP Participants”). If any

Additional KERP Participants are added they will have a title more junior than Vice President.

8. The KERP Participants have relevant expertise and knowledge of the

Debtors’ operations that make it essential that the KERP Participants remain employed through

the duration of these cases. The KERP Participants include employees from various functions,

including, but not limited to, (a) core legal, accounting, human resource and finance services, and

(b) core information technology, safety and business operations. A further description of the key

functions of these groups is as follows:

KERP Participants within the legal, accounting, human resources and finance functions assist the Debtors in managing their legal affairs, financial planning, employee programs, cash management, and treasury functions. Each of these individuals is critical to the operation of the Debtors’ business during these chapter 11 cases.

KERP Participants in the information technology, safety and business operations functions assist the Debtors in vendor relationships, supply chain management, safety and environmental management, and maintaining information technology systems. Each of these individuals is critical to maintaining the Debtors’ supply chain, preserving vendor relationships, maintaining safety, or ensuring the Debtors maintain functionality of their manufacturing operations.

9. While the KERP Participants are vital to the success of the Debtors’

restructuring, it is important to note that no KERP Participant is in a position of strategic control

over the restructuring, corporate decisions made in these chapter 11 cases, or the institution of the

KERP itself. Nor are any of the KERP Participants in a role outside of the chapter 11 process that

would make them an “insider.” The KERP Participants do not have company-wide decision-

making authority, and all report to a more senior member of the Debtors’ workforce rather than


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report directly to the Debtors’ ultimate board of managers. None report directly to the Debtor’s

CEO, and with one exception4 none regularly report to the board of managers.

10. Despite titles of “senior vice president,” “vice president,” “senior director,”

“director,” or the like, which are common in the Debtors’ industry, their duties are limited to a

particular function within legal, accounting, finance services, human resources, information

technology, safety and business services. Furthermore, each must obtain approval from

appropriate senior personnel before taking any significant action with respect to their roles.

Indeed, at a company as large as Hexion, a “vice president” is quite removed from the top decision-

making authority; there are twenty vice presidents, and another sixteen employees more senior

than any of the vice presidents. While these titles reflect their individual roles and functions

(typically in reference to a particular function, division or plant), they do not confer officer status

upon these employees. Any Additional KERP Participant, if any, will have similar duties, roles,

and functions to the KERP Participants.

B. Description of the KERP

11. The Debtors and their advisors reviewed the Debtors’ current needs and the

necessary features of a retention plan and, together, designed the KERP to be reasonable and

cost-effective and to ensure the commitment of the key personnel that will be essential to this

process. The Debtors and their advisors also ensured that the KERP was competitive within the

industry and that the awards set for the KERP Participants were appropriate. To design the KERP,

the Debtors engaged a compensation consultant, Mercer (US) Inc. (“Mercer”), who conducted a

thorough analysis of market comparisons within a bankruptcy context, historical compensation

levels at the Debtors, and general market compensation studies based on publicly available

4 One KERP Participant occasionally supports the CFO in making presentations to the board of managers.


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resources. Dempsey Declaration, ¶¶ 9, 16. Based on collective discussions, the Debtors

determined that tying the Retention Bonuses to emerging successfully from chapter 11 would have

the desired effect of retaining the KERP Participants and directing their efforts toward an

expeditious restructuring.

12. With this structure in mind, Mercer reviewed retention plan programs of

twenty eight (28) non-insider retention plans that have been approved for other similarly situated

companies going through chapter 11 in recent years (collectively, the “Comparable Programs”)

with similar prepetition revenues. Id. at ¶¶ 16, 19. The Comparable Programs covered a median

of 51 participants and a median total cost of $2 million and had similar average Retention Bonuses

to the KERP. Id. at ¶¶ 17-18. Mercer also found that it was market practice for a company to

make a plan payout either based on a pre-determined time-based schedule or on bankruptcy-based

milestones, such as emergence.

13. Based on this understanding of the market, the Debtors developed the

KERP, while keeping in mind their goals of maximizing the value of their estates for the benefit

of all interested parties and ensuring that their operations are conducted effectively and stably

throughout these chapter 11 cases. The potential Retention Bonus pool is approximately

$2 million, inclusive of a $205,000 discretionary pool (the “KERP Discretionary Pool”) that

provides the Debtors with the ability to disburse awards to the Additional KERP Participants who

are important to the Debtors’ restructuring. In turn, each Retention Bonus is based on the KERP

Participant’s level in the organization and is grouped into one of three tiers based on criticality to

the ongoing operation of the Debtors’ businesses. Id. at ¶ 11, 13. The Retention Bonuses for each

of the KERP Participants are reasonable in comparison to key employee retention programs of

similarly-sized businesses. Id. at ¶ 4(b).


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14. Without the Retention Bonuses under the proposed KERP, the KERP

Participants are more likely to leave their positions with the Debtors or to exhibit weakened job

performance due to increased responsibilities and stress and decreased motivation and morale.

Such a development has the potential to harm the value of the estates and affect the ability of the

Debtors’ to successfully consummate a restructuring.

15. An overview of the KERP is as follows:

Cost: The estimated cost of the KERP is $2,000,000, inclusive of the $205,000 KERP Discretionary Pool.

Retention Bonus: The Retention Bonuses will be paid in accordance with the

following chart:

Level Tier 1 Tier 2 Tier 3 Senior Vice President

$90,000 $85,000 $80,000

Vice President $75,000 $70,000 $65,000 Senior Director and Director

$60,000 $55,000 $50,000

Senior Manager and Manager

$35,000 $30,000 $25,000

Supervisor $15,000 $15,000 $15,000 Approximately 55% of the KERP Participants are in Tier 1, and approximately

21% in Tier 2, and 24% in Tier 3.

Reallocation: The Debtors further reserve the right, in their sole discretion, to reallocate forfeited Retention Bonuses of KERP Participants who leave the Debtors’ employ before the Debtors’ emergence from chapter 11 or who the Court determines to be ineligible to participate in the KERP.

Retention Bonus Schedule: All KERP Participants will be paid their respective

Retention Bonuses in connection with the Debtors’ emergence from chapter 11. Termination Provisions: Any KERP Participant who is terminated without

cause or due to death or permanent and total disability will receive a Retention Bonus prorated based on the time between (i) the filing date of these cases or the date of hire (whichever is later), and (ii) the date of termination of employment. Such prorated Retention Bonus will be paid at the same time as other participants, i.e., in connection with the Debtors’ emergence from chapter


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11.5 In the case of voluntary termination or termination for cause prior to the payment date, a KERP Participant’s Retention Bonus will be forfeited in its entirety. In the Debtors’ sole discretion, such forfeited allocation can be made available to Additional KERP Participants.

16. The Debtors seek approval of the KERP in order to increase the likelihood

that the Debtors are able to retain the KERP Participants and achieve a successful reorganization

through a comprehensive plan process, which may be jeopardized without the support of the KERP

Participants. The KERP Participants are uniquely qualified in their positions, and their skill and

institutional knowledge are critical to the Debtors’ efforts. Thus, it is important that the Debtors

maintain their loyalty and support their continued high performance during this timeframe. Indeed,

the loss of any of the KERP Participants could result in lost value of the Debtors’ estates and

disrupt their efforts to effectuate their reorganization. To minimize these risks and maximize the

value of these estates, the Debtors request that they be authorized to implement the KERP.

II. LEGAL BASIS FOR RELIEF REQUESTED

17. A company’s decision to file for chapter 11 is perhaps one of the most

stressful events a company will undertake, and as a result employee morale and productivity can

suffer. Unfortunately, these directly affect a debtor’s ability to maximize the value of their estates

and achieve the highest possible value for their stakeholders, which is why courts have consistently

authorized impartial and market competitive retention plans designed to reduce disruption to

employees while improving morale and job performance as a sound exercise of a debtor’s business

judgment and discharge of its role as fiduciary to its estate, as further described below. .

5 There will be no other conditions to receipt of the prorated Retention Bonus at emergence.


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A. The KERP Should be Approved Pursuant to 503(c).

18. The KERP should be approved pursuant to section 503(c)(3) of the

Bankruptcy Code. As an initial matter, the KERP is not subject to the restrictions in section

503(c)(1) of the Bankruptcy Code because the KERP is not applicable to any “insider” (as such

term is defined by section 101(31) of the Bankruptcy Code).

19. Generally, the Bankruptcy Code defines an “insider” to include, among

other things, “an officer of the debtor” and a “person in control of the debtor.” 11 U.S.C. § 101(31).

Courts also have concluded that an employee may be an “insider” if such employee has “at least a

controlling interest in the debtor or . . . exercise[s] sufficient authority over the debtor so as to

unqualifiably dictate corporate policy and the disposition of corporate assets.” In re Velo Holdings,

Inc., 472 B.R. 201, 208 (Bankr. S.D.N.Y. 2012) (citation and quotation omitted). Titles, like senior

vice president or vice president, are not determinative but may create a presumption that an

individual is an officer or director of the debtor, though evidence that such individual does not

participate in the management of the debtor company can rebut this presumption. In re Foothills

Texas, Inc., 408 B.R. 573 (Bankr. D. Del. 2009); In re Borders Grp., Inc., 453 B.R. 459, 469-70

(Bankr. S.D.N.Y. 2011) (noting that “[c]ompanies often give employees the title ‘director’ or

‘director-level,’ but do not give them decision-making authority akin to an executive” and

concluding that certain “director-level” employees in that case were not insiders).

20. As discussed above, for purposes of eligibility in the KERP, the Debtors

only considered non-insider employees for inclusion in the KERP. The KERP Participants do not

have the authority to make company-wide decisions for the Debtors. None of the KERP

Participants are a member of the Debtors’ board of managers, or report directly to the board of

managers or CEO. Each of the KERP Participants with the title of “senior vice president,” “vice

president,” “senior director,” “director,” or the like, which are common in the Debtors’ industry,


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reports to a more senior member of the Debtors’ workforce, and must obtain approval from

appropriate senior personnel before taking any significant action with respect to, among other

things, the Debtors’ corporate policies or the disposition of significant assets. Indeed, there are

sixteen employees at Hexion with titles more senior than “vice president”, emphasizing how such

a title in a company as large as Hexion does not indicate a level of control sufficient to constitute

an “insider”.6

21. Further, many of the KERP Participants’ duties are limited, respectively to

legal, accounting or finance services, information technology, and business services and may be

restricted to a particular function, division or plant. Despite titles such as “senior vice president,”

“vice president,” “senior director,” “director,” and “senior manager,” such titles does not confer

insider or officer status upon these employees. See In re NMI Sys., Inc., 179 B.R. 357, 370 (Bankr.

D.D.C. 1995) (finding that vice president was not insider because he was conferred title “for

purposes of marketing” only and was not “in the inner circle making the company’s critical

financial decisions.”); see also In re Global Aviation Holdings Inc., 478 B.R. 142, 148 (Bankr.

E.D.N.Y. 2012) (finding that director-level employees were not “officers” because none of them

were members of board, participated in corporate governance, or reported to board). Further, these

individuals do not have direct influence over the Debtors’ strategic, enterprise-wide decision-

making, notwithstanding the valuable role that they play in the Debtors’ organization. Courts have

declined to find insider status where the scope of authority is similarly limited. See In re Borders

Grp., Inc., 453 B.R. at 469 (employees in retention plan were not insiders because none of them

6 Hexion is thus very different from the small company in Foothills Texas, with only ten employees in total, making a “vice president” much closer to the actual company-wide decision-making.


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had authority to implement company policy, did not report to board of directors, and were

subordinate to actual officers).

22. Thus, like the key employees of the KERP this Court approved in Haggen,

the key employees here:

“do not attend board meetings on a regular basis”7;

“do not have the authority to make company-wide decisions”;

“do not exercise control over the governance or strategic direction of the

Debtors”;

“report to a more senior manager”; and

“must obtain approval from an appropriate senior manager before taking

any significant action with respect to the Debtors’ corporate policies or the

disposition of significant assets.”

In re Haggen Holdings, LLC, Case No. 15-11874 (KG), Decl. of Jonathan P. Goulding in Support

of Motion of Debtors for an Order Approving Their Key Employee Retention Plan [Docket No.

428], ¶ 11 (Bankr. D. Del. October 14, 2015) (attached hereto as Exhibit C); In re Haggen

Holdings, LLC, Case No. 15-11874 (KG), Hr’g Tr. at 97:16-24 (Bankr. D. Del. October 15, 2015)

(approving the KERP based on the evidence in the Goulding Declaration [Docket No. 428];

excerpt of the relevant portion of the Hr’g Tr. is attached hereto as Exhibit D).

7 The one exception is the Treasurer, but like the other recipients he does not have authority to make company-wide decisions, does not exercise control over the governance or strategic direction of the Debtors, reports to a more senior manager (George Knight, the Chief Financial Officer), and must obtain approval from the CFO before taking any material action.


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23. For the foregoing reasons, the Debtors respectfully submit that the KERP

Participants are not “insiders” as defined in the Bankruptcy Code, and therefore sections 503(c)(1)

and (2) of the Bankruptcy Code do not apply to the KERP and payment of the Retention Bonuses.

24. Accordingly, the relevant standard for evaluating the appropriateness of the

KERP is the business judgment standard under section 503(c)(3) of the Bankruptcy Code.

Generally, section 503(c)(3) of the Bankruptcy Code permits payments to a debtor’s employees

outside the ordinary course of business if such payments are justified by “the facts and

circumstances of the case.” 11 U.S.C. § 503(c)(3).8 The majority of courts have found that this

standard is no different from the business judgment standard under section 363(b) of the

Bankruptcy Code. See In re Global Home Prods., LLC, 369 B.R. at 783-87; In re Velo Holdings,

Inc., 472 B.R. at 212 (collecting cases); 4 Collier on Bankruptcy ¶ 503.17[4] (Henry J. Sommer &

Alan N. Resnick eds. 16th ed. rev. 2012); see also In re Nobex Corp., 2006 WL 4063024, at *3

(Bankr. D. Del. Jan. 19, 2006).

25. Additionally, the KERP complies with section 503(c)(3) of the Bankruptcy

Code, which prohibits transfers made “outside the ordinary course of business and not justified by

the facts and circumstances of the case.” Courts that have analyzed the prohibition on “other

transfers” have applied the same standard under that section as they do under section 363(b) of the

Bankruptcy Code: namely, whether the decision to use estate property outside of the ordinary

course of business is based on a sound exercise of the debtor’s business judgment. See Dana

8 Section 503(c)(3) of the Bankruptcy Code provides as follows:

[there shall neither be allowed, nor paid – ] (3) other transfers or obligations that are outside the ordinary course of business and not justified by the facts and circumstances of the case, including transfers made to, or obligations incurred for the benefit of, officers, managers, or consultants hired after the date of the filing of the petition.

11 U.S.C. § 503(c)(3).


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Corp., 358 B.R. 567, 576 (Bankr. S.D.N.Y 2006) (test for compensation program under section

503(c)(3) is same as “business judgment” test); Nobex, 2006 WL 4063024 at *3 (holding section

503(c)(3) applies requires similar analysis as section 363(b)).

26. In assessing a debtors’ business judgement regarding the implementation of

key employee retention programs, courts, including those in this District, have looked at the factors

laid out in Global Home-Prods. for guidance to evaluate a proposed retention program under

section 503(c)(3) of the Bankruptcy Code. The Global Home-Prods. factors are: (a) whether a

reasonable relationship existed between the proposed plan and the desired results; (b) whether the

cost of the plan was reasonable in light of the overall facts of the case; (c) whether the scope of the

plan was fair and reasonable; (d) whether the plan was consistent with industry standards;

(e) whether the debtor had put forth sufficient due diligence efforts in formulating the plan; and (f)

whether the Debtor received sufficient independent counsel in performing any due diligence and

formulating the plan. Global Home Prods., 369 B.R. at 786 (citing Dana Corp., 358 B.R. at 576-

77).

27. The KERP has been designed by the Debtors and their advisors, based on

market comparisons, to retain key employees throughout these chapter 11 cases at a reasonable

cost, thereby allowing the Debtors’ business to continue to operate and maintain going-concern

value.

28. As an initial matter, there is a reasonable relationship between the KERP

and the results to be obtained—retaining the KERP Participants—which alone should qualify the

KERP as a sound exercise of the Debtors’ business judgment. A debtor’s retention plan can be a

proper exercise of business judgment in that it allows the debtor to avoid the cost and delay

associated with the loss of personnel and their institutional knowledge. See In re Residential


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Capital, LLC, 491 B.R. 73, 85-86 (Bankr. S.D.N.Y. 2013) (approving retention plan for non-

insiders because of the “continuity promoted, and the institutional knowledge preserved, by the

retention of such employees”). The Debtors’ KERP is designed for such a purpose.

29. The Debtors recognize that their ability to retain the services of the KERP

Participants is jeopardized by the bankruptcy itself, which brings into doubt the long-term prospect

of employment for the KERP Participants. Concerns over continued employment may cause some

or all of the KERP Participants to pursue alternative employment at a critical stage of these chapter

11 cases. The Debtors can ill afford to lose the KERP Participants—employees who have the

experience and institutional knowledge necessary to the Debtors’ smooth operation and the

implementation of the reorganization. A failure to retain such KERP Participants would cause the

Debtors to incur significant costs attempting to obtain and train replacements, and obtaining

replacement employees would be extremely difficult, if not impossible. This could hinder and

delay the Debtors’ chapter 11 efforts, thus imposing further costs upon the Debtors and impairing

the value of the Debtors’ estates to the detriment of all stakeholders. Accordingly, the continuity

promoted, and the institutional knowledge preserved, by the retention of the KERP Participants

through the implementation of the KERP will facilitate the success of the Debtors’ restructuring

in an efficient and cost-effective manner.

30. The KERP was carefully constructed with the assistance of Mercer to: (a)

provide the KERP Participants with job security and appropriate market compensation, (b) prevent

attrition while the Debtors are implementing the restructuring and steadying the Debtors’ ongoing

operations and (c) ensure that the Debtors’ most critical non-insider personnel are retained through

the completion of the restructuring. The Debtors’ ability to carry out their chapter 11 objectives

and maximize the value of their estates will depend, in large part, on the continued employment,


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active participation, and dedication of the KERP Participants through the consummation of the

restructuring. If the KERP Participants were to leave their employment with the Debtors, the

Debtors’ ability to preserve and maximize their value and administer the chapter 11 cases would

be severely hampered. Thus, the costs associated with losing and replacing the KERP Participants

would far exceed the cost of the KERP.

31. Accordingly, the Debtors respectfully submit that the KERP is justified by

the fact and circumstances of the Debtors’ chapter 11 cases, is a sound exercise of business

judgment and that implementation of the KERP is in the best interests of the Debtors, their estates,

creditors, and all other stakeholders.

B. The KERP Should be Approved Pursuant to Section 363(b) of the Bankruptcy Code.

32. To the extent applicable, the KERP should also be approved under section

363(b)(1) of the Bankruptcy Code. Section 363(b)(1) provides that “[t]he [debtor], after notice

and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the

estate.” 11 U.S.C. § 363(b)(1). Use of estate property outside the ordinary course of business is

entrusted to the sound business judgment of a debtor. See, e.g., Myers v. Martin (In re Martin),

91 F.3d 389, 395 (3d. Cir. 1996) (“[U]nder normal circumstances the [bankruptcy] court would

defer to the trustee’s [or debtor-in-possession’s] judgment so long as there is a legitimate business

justification.”) (citation omitted); Computer Sales Int’l, Inc. v. Fed. Mogul Global (In re Fed.

Mogul Global, Inc.), 293 B.R. 124, 126 (D. Del. 2003) (“[I]n the Third Circuit, a court should

approve a debtor’s use of assets outside the ordinary course of business if the debtor can

demonstrate a sound business justification for the proposed transaction.”) (citations omitted).

Moreover, once a debtor articulates a valid business justification for the proposed use of estate

property, the bankruptcy court should give great weight to that judgment. See In re Comm. Mortg.,


17

414 B.R. 389, 394 (Bankr. N.D. Ill. 2009) (noting that a debtor in possession “has the discretionary

authority to exercise his business judgment in operating the debtor’s business similar to the

discretionary authority to exercise business judgment given to an officer or director of a

corporation”) (citations and quotation omitted).

33. For the same reasons as set forth above, the Debtors’ decision to implement

the KERP is a valid exercise of business judgment. See Global Home Prods., 369 B.R. at 783;

Borders Grp., Inc., 453 B.R. at 473–74 (holding that the “facts and circumstances” standard of

section 503(c)(3) of the Bankruptcy Code is “no different” than the business judgment standard

under section 363(b) of the Bankruptcy Code (citing Dana)); Velo Holdings, 472 B.R. at 212

(same); Residential Capital, 491 B.R. at 84 (same). The KERP represents a sound business

purpose and satisfies the business judgment rule. As discussed above, the KERP facilitates the

stabilization of the Debtors’ business and the success of these chapter 11 cases by incentivizing,

retaining, and protecting crucial employees to ensure that the restructuring is effectively and

efficiently implemented and that key business functions are maintained. These goals cannot be

met if skilled employees depart prematurely. Accordingly, the KERP should be approved as a

valid exercise of the Debtors’ business judgment pursuant to section 363(b) of the Bankruptcy

Code.

RESERVATION OF RIGHTS

34. Nothing contained in this motion is an admission of the validity of any claim

against the Debtors, a waiver of the Debtors’ or any other party’s rights to dispute any claim, or

an approval or assumption of any agreement, contract, or lease under section 365 of the Bankruptcy

Code. If this Court grants the relief requested in this motion, any Court-authorized payment is not

an admission of the validity of any claim or a waiver of the Debtors’ or any other party’s rights to

subsequently dispute such claim. In addition, authorization to pay the claims described in this


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motion will not be deemed a direction to the Debtors to pay such claims; rather, the Debtors will

make such payments in their discretion.

NOTICE

35. The Debtors will provide a copy of this Motion by first class mail to:

(i) Linda J. Casey of the Office of the United States Trustee for the District of Delaware; (ii) the

holders of the 30 largest unsecured claims against the Debtors on a consolidated basis; (iii) the

United States Attorney’s Office for the District of Delaware; (iv) the attorneys general for the

states in which the Debtors conduct business; (v) Akin Gump Strauss Hauer & Feld LLP as counsel

to the ad hoc group of first lien noteholders; (vi) Milbank LLP as counsel to the ad hoc group of

crossover noteholders; (vii) Jones Day as counsel to the ad hoc group of 1.5 lien noteholders;

(viii) Simpson Thacher & Bartlett LLP as counsel to JPMorgan Chase Bank, N.A. as

administrative agent and collateral agent under the Debtors’ prepetition asset-based revolving

credit facility; (ix) Wilmington Trust, National Association, as trustee under the First Lien Notes

and the Second Lien Notes; (x) Arnold & Porter Kaye Scholer LLP as counsel to Wilmington

Savings Fund Society, FSB, as trustee under the 1.5 Lien Notes; (xi) The Bank of New York

Mellon, as trustee under the Borden Debentures; (xii) Simpson Thacher & Bartlett LLP and Landis

Rath & Cobb LLP as counsel to the administrative agent and collateral agent under the Debtors’

postpetition financing facility; (xiii) the Internal Revenue Service; (xiv) the Securities and

Exchange Commission; (xv) the Pension Benefit Guaranty Corporation; (xvi) the Environmental

Protection Agency; (xvii) counsel to any official statutory committee that is appointed; and (xviii)

any party that has requested notice pursuant to Bankruptcy Rule 2002. A copy of this Motion is

also available on the Debtors’ case website at http://www.omnimgt.com/HexionRestructuring.


19

The Debtors respectfully request entry of an order, substantially in the form

attached as Exhibit A, granting the relief requested in its entirety and any other relief as is just and

proper.

Dated: April 10, 2019 Wilmington, Delaware /s/ Amanda R. Steele

Mark D. Collins (No. 2981) Michael J. Merchant (No. 3854) Amanda R. Steele (No. 5530) Brendan J. Schlauch (No. 6115) RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: 302-651-7700 Fax: 302-651-7701 Email: [email protected] [email protected] [email protected] [email protected] - and - George A. Davis (admitted pro hac vice) Andrew M. Parlen (admitted pro hac vice) Hugh Murtagh (admitted pro hac vice) LATHAM & WATKINS LLP 885 Third Avenue New York, New York 10022 Telephone: (212) 906-1200 Facsimile: (212) 751-4864 Email: [email protected] [email protected] [email protected] - and - Caroline A. Reckler (admitted pro hac vice) Jason B. Gott (admitted pro hac vice) LATHAM & WATKINS LLP 330 North Wabash Avenue, Suite 2800 Chicago, Illinois 60611 Telephone: (312) 876-7700 Facsimile: (312) 993-9767 Email: [email protected] [email protected] Proposed Attorneys for the Debtors and Debtors in Possession


RLF1 21075810v.1



x : : : : : : : : x

Chapter 11 Case No. 19-10684 (KG) Jointly Administered Objection Deadline: April 24, 2019 at 4:00 p.m. (ET) Hearing Date: May 1, 2019 at 2:00 p.m. (ET)

NOTICE OF MOTION AND HEARING

PLEASE TAKE NOTICE that, on April 10, 2019, Hexion Holdings LLC and its

affiliated debtors and debtors-in-possession in the above-captioned cases (collectively,

the “Debtors”) filed the Debtors’ Motion for Entry of an Order Approving the Key Employee

Retention Program (the “Motion”) with the United States Bankruptcy Court for the District of

Delaware (the “Bankruptcy Court”).

PLEASE TAKE FURTHER NOTICE that, any responses or objections to the

Motion must be in writing and filed with the Clerk of the Bankruptcy Court, 824 North Market

Street, 3rd Floor, Wilmington, Delaware 19801 on or before April 24, 2019 at 4:00 p.m.

(prevailing Eastern Time).

1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are Hexion Holdings LLC (6842); Hexion LLC (8090); Hexion Inc. (1250); Lawter International Inc. (0818); Hexion CI Holding Company (China) LLC (7441); Hexion Nimbus Inc. (4409); Hexion Nimbus Asset Holdings LLC (4409); Hexion Deer Park LLC (8302); Hexion VAD LLC (6340); Hexion 2 U.S. Finance Corp. (2643); Hexion HSM Holdings LLC (7131); Hexion Investments Inc. (0359); Hexion International Inc. (3048); North American Sugar Industries Incorporated (9735); Cuban-American Mercantile Corporation (9734); The West India Company (2288); NL Coop Holdings LLC (0696); and Hexion Nova Scotia Finance, ULC (N/A). The address of the Debtors’ corporate headquarters is 180 East Broad Street, Columbus, Ohio 43215.

Case 19-10684-KG Doc 155-1 Filed 04/10/19 Page 1 of 3

2 RLF1 21075810v.1

PLEASE TAKE FURTHER NOTICE that, if any objections to the Motion are

received, the Motion and such objections shall be considered at a hearing before The Honorable

Kevin Gross at the Bankruptcy Court, 824 North Market Street, 6th Floor, Courtroom No. 3,

Wilmington, Delaware 19801 on May 1, 2019 at 2:00 p.m. (prevailing Eastern Time).

PLEASE TAKE FURTHER NOTICE THAT, IF NO OBJECTIONS TO

THE MOTION ARE TIMELY FILED, SERVED AND RECEIVED IN ACCORDANCE

WITH THIS NOTICE, THE BANKRUPTCY COURT MAY GRANT THE RELIEF

REQUESTED IN THE MOTION WITHOUT FURTHER NOTICE OR HEARING.


3 RLF1 21075810v.1

Dated: April 10, 2019 Wilmington, Delaware /s/ Amanda R. Steele

Mark D. Collins (No. 2981) Michael J. Merchant (No. 3854) Amanda R. Steele (No. 5530) Brendan J. Schlauch (No. 6115) RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: (302) 651-7700 Fax: (302) 651-7701 Email: [email protected] [email protected] [email protected] [email protected] - and - George A. Davis (admitted pro hac vice) Andrew M. Parlen (admitted pro hac vice) Hugh Murtagh (admitted pro hac vice) LATHAM & WATKINS LLP 885 Third Avenue New York, New York 10022 Telephone: (212) 906-1200 Facsimile: (212) 751-4864 Email: [email protected] [email protected] [email protected] - and - Caroline A. Reckler (admitted pro hac vice) Jason B. Gott (admitted pro hac vice) LATHAM & WATKINS LLP 330 North Wabash Avenue, Suite 2800 Chicago, Illinois 60611 Telephone: (312) 876-7700 Facsimile: (312) 993-9767 Email: [email protected] [email protected]

Proposed Attorneys for the Debtors and Debtors in Possession


Exhibit A

Proposed Order




x : : : : : x

Chapter 11 Case No. 19-10684 (KG) Jointly Administered

ORDER APPROVING KEY EMPLOYEE RETENTION PROGRAM

Upon the Debtors’ motion (the “Motion”)2 for entry of an order (this “Order”)

approving the key employee retention program, as more fully set forth in the Motion; and due and

sufficient notice of the Motion having been provided under the particular circumstances, and it

appearing that no other or further notice need be provided; and the Court having jurisdiction to

consider the Motion and the relief requested therein in accordance with 28 U.S.C. §§ 157 and 1334

and the Amended Standing Order of Reference from the United States District Court for the District

of Delaware dated as of February 29, 2012; and consideration of the Motion and the relief

requested therein being a core proceeding under 28 U.S.C. § 157(b)(2); and that this Court entry

a final order being consistent with Article III of the United States Constitution; and venue being

proper before this Court under 28 U.S.C. §§ 1408 and 1409; and a hearing having been held to

consider the relief requested in the Motion (the “Hearing”); and upon the Knight Declaration, the

1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are Hexion Holdings LLC (6842); Hexion LLC (8090); Hexion Inc. (1250); Lawter International Inc. (0818); Hexion CI Holding Company (China) LLC (7441); Hexion Nimbus Inc. (4409); Hexion Nimbus Asset Holdings LLC (4409); Hexion Deer Park LLC (8302); Hexion VAD LLC (6340); Hexion 2 U.S. Finance Corp. (2643); Hexion HSM Holdings LLC (7131); Hexion Investments Inc. (0359); Hexion International Inc. (3048); North American Sugar Industries Incorporated (9735); Cuban-American Mercantile Corporation (9734); The West India Company (2288); and NL Coop Holdings LLC (0696). The address of the Debtors’ corporate headquarters is 180 East Broad Street, Columbus, Ohio 43215. 2 Capitalized terms used but not defined in this Order have the meanings used in the Motion.


2

Dempsey Declaration and the record of the Hearing and all the proceedings before the Court; and

the Court having found and determined such relief to be in the best interests of the Debtors, their

estates and creditors, and any parties in interest; and the legal and factual bases set forth in the

Motion and at the Hearing having established just cause for the relief granted herein; and after due

deliberation thereon and sufficient cause appearing therefor, it is HEREBY ORDERED THAT:

1. The Motion is granted as set forth herein.

2. The KERP is approved on the terms described in the Motion.

3. The Debtors, in their sole discretion and without further notice to the Court,

may designate additional employees who have a title that is less senior than a vice president as

KERP Participants; provided, however, that the Debtors will not increase the aggregate amount of

Retention Bonuses to more than $2,000,000 without further order of the Court.

4. The Debtors, in their sole discretion and without further notice to the Court,

may reallocate any forfeited Retention Bonus from KERP Participants who leave the Debtors’

employ before the Debtors’ emergence from chapter 11 or who the Court determines to be

ineligible to participate in the KERP to additional employees designated for participation in the

KERP under paragraph 3 of this Order.

5. The requirements set forth in Bankruptcy Rule 6004(a) are hereby waived.

6. Notwithstanding the applicability of Bankruptcy Rule 6004(h), the terms

and conditions of this Order are immediately effective and enforceable upon its entry.

7. The Debtors are authorized and empowered to take all actions necessary or

appropriate to implement the relief granted in this Order.


3

8. This Court retains jurisdiction over all matters arising from or related to the

implementation or interpretation of this Order.


Exhibit B

Dempsey Declaration




x : : : : : x

Chapter 11 Case No. 19-10684 (KG) Jointly Administered

DECLARATION OF JOHN DEMPSEY

IN SUPPORT OF DEBTORS’ MOTION FOR ENTRY OF AN ORDER APPROVING THE KEY EMPLOYEE RETENTION PROGRAM

1. My name is John Dempsey. I am over the age of 18 and competent to

testify. I am a Partner at Mercer (US) Inc. (“Mercer”). My business address is 155 North Wacker

Drive, Suite 1500, Chicago, Illinois 60606. Mercer is a global professional compensation services

firm that was engaged by the above-captioned debtors and debtors-in-possession (collectively, the

“Debtors” or the “Company”).

2. Except as otherwise indicated, all facts set forth in this declaration (the

“Declaration”) are based upon my personal knowledge of the Debtors’ operations and finances,

information learned from my review of relevant documents, and information supplied to me by

members of the Debtors’ management and the Debtors’ advisors. I am authorized to submit this

Declaration in support of the Debtors’ Motion for Entry of an Order Approving the Key Employee

1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are Hexion Holdings LLC (6842); Hexion LLC (8090); Hexion Inc. (1250); Lawter International Inc. (0818); Hexion CI Holding Company (China) LLC (7441); Hexion Nimbus Inc. (4409); Hexion Nimbus Asset Holdings LLC (4409); Hexion Deer Park LLC (8302); Hexion VAD LLC (6340); Hexion 2 U.S. Finance Corp. (2643); Hexion HSM Holdings LLC (7131); Hexion Investments Inc. (0359); Hexion International Inc. (3048); North American Sugar Industries Incorporated (9735); Cuban-American Mercantile Corporation (9734); The West India Company (2288); and NL Coop Holdings LLC (0696). The address of the Debtors’ corporate headquarters is 180 East Broad Street, Columbus, Ohio 43215.


2

Retention Program (the “Motion”).2 If called upon to testify, I could and would testify

competently to the facts set forth herein.

A. Overview

3. I am an expert in executive and management compensation with over 30

years of experience in the field. I have familiarized myself with the Debtors’ operations and unique

challenges, provided assistance in developing the Debtors’ the non-insider key employee retention

plan (the “KERP”), gathered relevant market compensation data, and analyzed whether the

Debtors’ employee compensation plans are consistent with market practice.

4. Based on my analysis and the facts and circumstances of these chapter 11

cases, I have concluded that the KERP is reasonably designed and consistent with typical market

practice. This conclusion is based on the following key elements:

(a) the KERP awards non-insider employees with retention payments if such employees remain with the Debtors through emergence from chapter 11, thus facilitating a smooth reorganization process, without which there may be significant business disruption, thereby reducing the value of the estates; and

(b) the estimated level of compensation provided under the KERP, when considered within the context of total compensation, is reasonable in comparison to key employee retention programs of other similarly-sized businesses.

B. Background and Qualifications

5. I joined Mercer in 1985, following my graduation from Yale University,

and have worked out of the firm’s offices in Chicago, Cleveland, and London. I received an MBA

in 1992 from The Ohio State University. I have been a Principal or Partner at Mercer for

approximately 18 years.

2 Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Motion.


3

6. Mercer is an international professional services firm that offers a wide

variety of services to private and public clients, including expert analysis of executive and

management compensation. Mercer has access to a broad range of market compensation data,

including data specific to companies in chapter 11 proceedings, and has substantial expertise in

designing such programs for companies in the midst of restructuring or bankruptcy.

7. I have extensive experience advising organizations undergoing major

financial transitions including bankruptcies, IPOs, LBOs and acquisitions, on compensation issues,

and with designing annual and multi-year incentive programs, change in control arrangements,

and employment agreements. My recent bankruptcy-related engagements include TridentCare,

Aceto, Arch Coal, Peabody, SunEdison, Synergy Pharmaceuticals, Dendreon, Altegrity, Allied

Nevada, James River, Exide Technologies, RIH Acquisitions NJ, Residential Capital, Overseas

Shipholding Group, Allied Systems Holdings, Patriot Coal, Borders, Synagro Technologies,

Nortel Networks, Tribune Company, Aleris, Charter Communications, Masonite, CIT Group,

Capmark, Fairpoint, Caraustar, Adelphia Communications (Creditors’ Committee), R.H.

Donnelley, Freedom Communications, Stallion, Dana, Owens Corning, Kaiser Aluminum,

Solutia, Ogelebay Norton, Citation, Intermet, Venture Holdings, Alterra, EaglePicher, Allied

Holdings, Mesaba Aviation, and FLAG Telecom. In particular, I have advised debtors on

designing key employee retention plans in over 30 engagements.

8. Additionally, I published an article entitled Bankruptcy Blues: Retaining

Employees During a Financial Crisis with Michael Siebenhaar in the February 2002 issue of

Workspan, and an update, The New Challenge of Chapter 11, with Elizabeth Stephens in August

2008. I have been frequently quoted on issues relating to effective transitional compensation

practices in such publications as HR Magazine, Cox News, and the Atlanta Journal Constitution.


4

In addition, I have been quoted in the Dallas Morning News, the Chicago Tribune, and the

Milwaukee Journal Sentinel. I have also presented at the National Meeting of the Conference

Board, the National Association of Stock Plan Professionals, and the National Center for Employee

Ownership.

C. Mercer’s Independent Review

9. Mercer was engaged by the Debtors on February 6, 2019 to work with the

Debtors and their legal and financial advisers at Latham & Watkins, LLP (“Latham”) and

AlixPartners, LLP (“AlixPartners”), respectively, to, among other things, advise the Debtors on

the creation and implementation of the KERP. At the start of this engagement, Mercer became

familiar with the Debtors’ operational history and challenges, and in particular, those challenges

that led to the filing of these chapter 11 cases. Specifically, Mercer reviewed the Debtors’ current

and historical financial records and organizational information. In addition, Mercer consulted with

the Company’s executives, HR professionals, as well as Latham and AlixPartners to become

familiar with the Debtors’ operations and challenges. Mercer then reviewed the Debtors’ existing

base salaries and the historical design of the prepetition incentive compensation and bonus

programs. Through these efforts, Mercer was fully able to understand the Debtors’ recent

compensation history and to evaluate the Debtors’ proposed KERP.

The Non-Insider Key Employee Retention Plan

A. Key Employee Retention Plan Design

10. Mercer worked with the Debtors to design a non-insider retention plan for

certain non-insider employees (the “KERP Participants”) that the Debtors determined are critical

to driving the strategic objectives and operations of the Company. In particular, the KERP was

designed to ensure that thirty-three (33) key non-insider employees would remain with the Debtors

throughout the challenges and uncertainty of the chapter 11 process. The Debtors also seek


5

authority to add other employees to the KERP, whether in place of any KERP Participants who

may be terminated or resign or in light of new developments or needs as the Debtors proceed

through these cases (the “Additional KERP Participants”).

11. Mercer developed a criticality assessment framework, which was utilized

by the Debtors’ HR leadership in consultation with other members of senior management, to

identify key employees for participation in the KERP. Critical roles were selected based on criteria

such as: (a) role criticality, (b) anticipated difficulty to backfill the role, (c) individual criticality,

(d) risk of attrition, and (e) performance rating. In this context, KERP Participants were chosen

based on heavy work load and hybrid responsibilities: each participant has significant daily

responsibilities associated with the Debtors’ ongoing operations as well as substantial additional

responsibilities arising out of the restructuring process. Based on the results of the criticality

assessment, KERP Participants were categorized into three “tiers,” with Tier 1 having the highest

impact and assuming the most essential responsibilities to the Debtors’ ongoing operations.3

12. Based on my experience and interaction with the company, I believe the

Company’s process was appropriately designed to identify key employees whose retention is

essential to the success of the Company and the restructuring process.

13. The KERP award levels are guided by the Participant’s tier and level in the

organization. KERP awards range from $15,000 to $90,000, and 19% to 37% of base salary. The

aggregate cost of the KERP is $2 million, which includes approximately $1.795 million in

allocated awards and a discretionary pool of approximately $205,000 that can be allocated to

3 For the avoidance of doubt, all of the KERP Participants are critical and impactful. The tiering is based on criticality relative to other participants in the KERP.


6

Additional KERP Participants as appropriate. In the event a participant terminates prior to

payment, the forfeited award may also be reallocated to Additional KERP Participants.

14. For a KERP Participant who remains with the Debtors throughout the

chapter 11 process, KERP awards will be payable upon emergence from bankruptcy.

15. Consistent with market practice, the KERP provides for pro rata awards for

any KERP Participant who is terminated without cause or due to death or permanent and total

disability. Payment will be made at the same time as other participants, with the amount prorated

based on the time between (i) the filing date of these cases or the date of hire (whichever is later),

and (ii) the date of termination of employment. In the case of voluntary termination or termination

for cause prior to the payment date, awards will be forfeited in their entirety. Based on my

experience and interaction with the Company, I believe the payment timing is appropriate to

incentivize these key employees to remain with the Debtors through the chapter 11 process.

B. Key Employee Retention Plan Market Study

16. To assess the reasonableness of the proposed KERP relative to market

practice, Mercer identified seventy (70) non-insider retention plans (across industries) approved

by bankruptcy courts in this and other districts. To facilitate a more refined comparison, from the

total population Mercer then identified a subset of twenty-eight (28) companies in Mercer’s

database that had prepetition revenues between approximately $1 billion and $10 billion. Mercer

then compared the maximum cost of the KERP to the cost of the similar key employee retention

programs implemented by the total population as well as by the twenty-eight comparably-sized

debtors. In my experience, it is appropriate to focus on the size of the company rather than the

industry because there is a strong correlation between the size of company and the compensation

paid. In addition, I believe a range of approximately $1 billion to $10 billion in prepetition annual


7

revenues is appropriate because it reflects a comparative sample in light of the Debtors’ prepetition

revenue size of approximately $4 billion.

17. The results of Mercer’s analysis on the total cost of the proposed KERP can

be found in Table 1. As outlined below, the cost of the KERP is aligned to the market 50th

percentile for comparably-sized companies. As a result, I believe the total cost of the KERP is

appropriate.

Table 1: Proposed KERP Compared to Market: Total Cost

Max Total Cost ($M)

Debtors’ KERP $2.00 Market: All Comparator Companies

75th Percentile $2.97 50th Percentile $1.37 25th Percentile $0.79

Market: Comparator Companies with

Revenue $1B - $10B

75th Percentile $3.51 50th Percentile $2.00 25th Percentile $1.21

18. To assess whether the scope of the Company’s KERP was in line with the

market, Mercer compared the number of eligible participants in the Debtors’ KERP to the number

of participants in the key employee retention plans implemented by comparator companies. The

results of Mercer’s analysis on the level of inclusion of the proposed KERP can be found in Table

2. As outlined below, the number of KERP Participants is in line with market practice as it is just

above the 25th percentile. As a result, I believe the scope of the Debtors’ KERP is appropriate.


8

Table 2: Proposed KERP Compared to Market: Participation

Total Number of Eligible Employees

Debtors’ KERP 33 Market: All Comparator Companies

75th Percentile 118 50th Percentile 48 25th Percentile 27

Market: Comparator Companies with

Revenue $1B - $10B

75th Percentile 156 50th Percentile 51 25th Percentile 32

19. Mercer also analyzed the proposed KERP in the context of payout timing.

From its study, Mercer found that the predominant market practice used continued employment as

the sole basis of payout determination. Mercer also found that it was market practice for a

company to make a plan payout either based on a pre-determined time-based schedule or on

bankruptcy-based milestones, such as emergence.

20. In sum, given the facts and circumstances of these chapter 11 cases and the

criticality of the KERP Participants to the Debtors’ business and the Debtors’ ability to

successfully reorganize and implement the Plan of Reorganization, we find that the proposed

KERP is reasonable in the context of market practice.

[Remainder of page intentionally left blank]


9

Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true

and correct.

Dated: April 10, 2019 New York, New York

/s/ John Dempsey John Dempsey


Exhibit C

Goulding Declaration from In re Haggen Holdings, LLC


01:17833864.3


) In re: ) Chapter 11 ) HAGGEN HOLDINGS, LLC, et al.,1 ) Case No. 15-11874 (KG) ) Debtors.

) )

(Jointly Administered)

) Ref. Docket No. 177

DECLARATION OF JONATHAN P. GOULDING IN SUPPORT OF MOTION OF DEBTORS FOR AN ORDER

APPROVING THEIR KEY EMPLOYEE RETENTION PLAN

I, Jonathan P. Goulding, make this declaration under 28 U.S.C. § 1746:

1. I am a Managing Director with Alvarez & Marsal North America, LLC

(together with employees of its affiliates (all of which are wholly-owned by its parent company

and employees), its wholly owned subsidiaries, and independent contractors, “A&M”), a

restructuring advisory services firm with numerous offices throughout the country.

2. I submit this declaration (the “Declaration”) in support of the Motion of

Debtors for an Order Approving Their Key Employee Retention Plan [Docket No. 177] (the

“Motion”).2

3. Except as otherwise indicated, all facts set forth in this Declaration are

based upon my personal knowledge and experience, my discussions with the Debtors’ senior

management team, other members of the A&M team, my review of relevant documents, or my

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Haggen Holdings, LLC (7558), Haggen Operations Holdings, LLC (6341), Haggen Opco South, LLC (7257), Haggen Opco North, LLC (5028), Haggen Acquisition, LLC (7687), and Haggen, Inc. (4583). The mailing address for each of the Debtors is 2211 Rimland Drive, Bellingham, WA 98226. 2 Capitalized terms not otherwise herein defined shall have the meanings ascribed to such terms in the Motion.

Case 15-11874-KG Doc 428 Filed 10/14/15 Page 1 of 7Case 19-10684-KG Doc 155-4 Filed 04/10/19 Page 2 of 8

2

01:17833864.3

opinion based upon experience. I am authorized to submit this Declaration. If called upon to

testify, I could and would testify competently to the facts set forth herein.

QUALIFICATIONS

4. I received my bachelor’s degree in chemical engineering from the

University of Michigan in 1997. I specialize in liquidity management, financial and strategic

planning, and implementation of financial strategies for corporate turnarounds and restructuring.

I have more than eighteen (18) years of experience in management consulting and financial

restructuring. In addition, I am a Certified Insolvency and Restructuring Advisor (CIRA) and a

Chartered Financial Analysis (CFA) charterholder.

5. A&M has been engaged to provide general restructuring and financial

advice to the Debtors since July 20, 2015. I am the Debtors’ lead advisor for A&M in this

engagement. As a result, during the course of A&M’s engagement, I have worked closely with

the Debtors’ management and other retained professionals and have become well-acquainted

with the Debtors’ business operations and capital structure.

6. As part of my duties as restructuring advisor, I am frequently asked to

assist chapter 11 debtors in the evaluation of implementing and the development of key

employee retention plans. Based on the facts of a particular case and the needs and objectives of

a particular company or restructuring, I assist chapter 11 debtors and their boards in the

evaluation of retention plans to ensure a successful outcome for the case or to maximize value. I

do not recommend key employee retention plans in all cases.

7. I was intimately involved in the development and structuring of the key

employee retention plan (the “KERP”) that is the subject of the Motion.


3

01:17833864.3

THE DEVELOPMENT OF THE KERP

8. The Debtors did not have a formal severance program in place prior to the

Petition Date. Due to the Debtors’ lack of a formal severance program, I, along with other A&M

professionals, worked with the Debtors to develop the KERP to induce the Key Employees to

remain with the Debtors through the completion of the Debtors’ restructuring or the Store

Closing and Pharmacy Sales. A&M and the Debtors had extensive discussions regarding the

types of retention plans utilized in chapter 11 cases.

9. For the purposes of selecting Key Employees for the KERP, the Debtors,

in consultation with A&M, evaluated the ongoing needs of the Debtors’ business and the key

tasks that need to be completed to implement the Store Closing and Pharmacy Sales. The

business impact and retention risk of employees was then evaluated based on (a) an employee’s

unique or significant knowledge of the Debtors’ infrastructure and business, (b) whether the

employee’s unique skills or experiences would be crucial to the Debtors’ operation, restructuring

or implementation of the Store Closing and Pharmacy Sales, (c) the anticipated demand for the

aforementioned knowledge and skills in the marketplace, and (d) the time, expense, and ease of

finding an adequate replacement.

10. After selecting the Key Employees, the Debtors and A&M examined the

importance of the Key Employees to the implementation of the Store Closing and Pharmacy

Sales or the Debtors’ ongoing operations at their remaining stores. The Debtors and A&M

structured the KERP awards to reflect the relative importance of each Key Employee to these

efforts, with awards ranging from three (3) to eight (8) weeks of pay at the eligible employee’s

base salary. Specifically, store and pharmacy managers at the Closing Stores will receive a

KERP award of three weeks of their base salary. Certain Key Employees providing financial


4

01:17833864.3

and operational support to the Debtors essential to their ongoing operations or services essential

to ensure the orderly wind-down of the Closing Stores will receive an award of either four, six,

or eight weeks of their base salary.

THE KEY EMPLOYEES ARE NOT INSIDERS OF THE DEBTORS

11. The Key Employees work across a variety of departments, but generally

fall into the following categories: (a) store managers; (b) pharmacy managers; and (c) financial,

human resources, marketing, and operations specialists. Although certain of the Key Employees

have titles such as “director,” “manager,” and “vice president,” no Key Employee is an officer or

director of any of the Debtors, and no Key Employee is appointed by the Debtors’ board of

directors. The Key Employees do not attend board meetings on a regular basis and they do not

have the authority to make company-wide decisions. Moreover, the Key Employees do not

exercise control over the governance or strategic direction of the Debtors, nor are they involved

in the Debtors’ policy making. Each Key Employee reports to a more senior manager and must

obtain approval from an appropriate senior manager before taking any significant action with

respect to the Debtors’ corporate policies or the disposition of significant assets. Further, many

of the Key Employees’ duties are limited to particular divisions or stores, further constricting

their scope of authority. Therefore, while the titles of the Key Employees reflect their individual

roles and functions, they do not confer officer status upon the Key Employees and thus do not

take part in the direction or management of the Debtors’ business. Rather, the Key Employees

are critical employees of the Debtors who have the knowledge and experience to carry out the

decisions of the Debtors’ management in an efficient and cost-effective manner.

12. Accordingly, given their positions in the corporate chain of command,

their distance from the Debtors’ board of directors and senior management, and the limited


5

01:17833864.3

extent of their corporate authority to make decisions regarding the direction or management of

the Debtors’ business, I believe that the Key Employees are not “insiders” of the Debtors as

defined in section 101(31) of the Bankruptcy Code.

THE KERP IS JUSTIFIED UNDER THE CIRCUMSTANCES

13. The KERP provides retention payments to approximately 231 Key

Employees. The average annual salary of the Key Employees is $106,800. The total cost of the

KERP is expected to be approximately $1,604,038, thus making the average amount to be paid

under the KERP to a Key Employee approximately $6,945.

14. The Key Employees are integral to implementing the Store Closing and

Pharmacy Sales and the orderly wind-down of operations at the Closing Stores. In addition,

certain of the Key Employees are critical to carrying on the ongoing operations at the Debtors’

core stores and maintaining essential business functions. Each Key Employee has a unique skill

set and/or knowledge of the Debtors’ operations and business that would be difficult if not

impossible to replace. Preserving these skills and knowledge is essential to the efficient

administration of the Debtors’ estates and the success of the Store Closing Sales.

15. The Debtors determined to implement the KERP to ensure that they do not

suffer significant and costly Key Employee turnover during the chapter 11 process. The

circumstances of these chapter 11 cases are likely to increase employee turnover, particularly in

light of the Store Closing Sales. Given the workforce reductions that are anticipated at the

Closing Stores and the general uncertainty among the Debtors’ employees about their job

security as a result of the Debtors’ current financial distress, based on my experience, I believe

that the KERP is both necessary and appropriate to ensure the Debtors’ retention of the Key

Employees.


6

01:17833864.3

16. The KERP was constructed with the goal of retaining Key Employees by

providing them with job security and appropriate compensation commensurate with market rates

to: (a) prevent attrition while the Debtors are implementing the Store Closing and Pharmacy

Sales and steadying the Debtors’ ongoing operations at their remaining stores and (b) ensure that

the Debtors’ most critical non-insider personnel are retained through the completion of the Store

Closing Sales. Based on my experience, I believe that the Key Employees are likely to terminate

their employment with the Debtors and pursue other job opportunities without the retention

payments contemplated by the KERP. In fact, forty-three (43) Key Employees have already left

the employment of the Debtors.

17. It is my opinion that the Debtors’ ability to carry out their chapter 11

objectives and maximize the value of their estates will depend, in large part, on the continued

employment, active participation, and dedication of the Key Employees through the expiration of

the KERP Eligibility Period. If the Key Employees were to leave their employment with the

Debtors, I believe that the Debtors’ ability to preserve and maximize their value and administer

the chapter 11 cases would be severely hampered. In addition, I believe that the loss of Key

Employees at the Closing Stores would seriously jeopardize the Debtors’ ability to orderly and

efficiently conduct the Store Closing and Pharmacy Sales, thus imposing further costs upon the

Debtors, risking damage to merchandise and furniture, fixtures, and equipment at the Closing

Stores, and impairing the value of the Debtors’ estates to the detriment of all stakeholders. Thus,

it is my opinion that the costs associated with losing and replacing the Key Employees would far

exceed the cost of the KERP.

18. Based on my experience and the work I have done in these chapter 11

cases, it is my opinion that the KERP is reasonable, within market norms, and tailored to retain


7

01:17833864.3

the Key Employees in order to maximize value for all of the Debtors’ stakeholders and ensure

the efficient administration of these chapter 11 cases.

I declare under penalty of perjury that the foregoing is true and correct. Executed

on October 14, 2015

/s/ Jonathan P. Goulding Jonathan P. Goulding


Exhibit D

Excerpt of KERP Hr’g Tr. in In re Haggen Holdings, LLC Hr’g


90

1 And we're on to the KERP.

2 MR. MEROLA: Yes, Your Honor. Number 13 on your

3 agenda, the motion for a key employee retention plan.

4 THE COURT: That's right.

5 MR. MEROLA: And -- I apologize, Your Honor.

6 Given the background in conjunction with the motion on

7 the store closing sales, this KERP plan relates to the second

8 phase hundred stores that were closing. And because we're --

9 these close -- stores will eventually close, the senior

10 management realized that it needed ongoing support of

11 operational management in order to complete this herculean

12 task.

13 Before we get started, Your Honor, I'd like to move

14 for the admission of the declarations in support of this -- in

15 support of the KERP motion, both the Goulding Declaration and

16 the -- excuse me, Your Honor -- the Bennett [sic] -- the Blake

17 Barnett Declaration (phonetic).

18 THE COURT: Yes.

19 MR. MEROLA: Thank you, Your Honor.

20 THE COURT: And any objection to admitting those into

21 evidence?

22 (No verbal response)

23 THE COURT: All right. They are so admitted then.

24 (Goulding KERP Declaration Received into Evidence)

25 (Barnett Declaration Received into Evidence)


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1 MR. MEROLA: As proposed, Your Honor, the KERP covers

2 231 key employees, at a total approximate cost of 1.6 million.

3 That's an average of $6,945 per employee. The vast majority of

4 the key employees are -- 206 of the 231 are either store

5 managers or pharmacy managers. In the company, they're

6 designated as "store directors," as opposed to store managers.

7 These operational-level managers are being asked to

8 stay at their jobs in a very challenging operating climate,

9 until the store closures, to literally, possibly work

10 themselves out of a job, for which the KERP provides them three

11 weeks compensation.

12 The remaining 25 key employees were -- that are

13 covered by the KERP are located at the Irvine headquarters that

14 will be closed, and they provide the back-of-the-house support

15 to the store-level managers in areas such as human resources,

16 loss prevention, purchasing, merchandising, accounting, and

17 finance. These 25 employees will receive either four, six, or

18 eight weeks as a KERP payment.

19 I want to be clear, Your Honor, that none of the key

20 employees covered by this KERP are C level or E level

21 employees. This is the not the CFO, this is not a director,

22 this is a CEO. These are people that actually keep the stores

23 running, make sure the money in the register ends up in a bag

24 and goes into the bank at the end of the night.

25 THE COURT: Yes.


92

1 MR. MEROLA: The Office of the United States Trustee,

2 the UCC, the agent for the DIP lenders, and the union all

3 received a detailed chart, listing each of the key employees by

4 title and compensation level.

5 Since the filing of the KERP motion, 43 of the 231 key

6 employees have resigned. That's how -- that's in the Goulding

7 Declaration. That demonstrates how fragile the debtors'

8 situation is with front-line management, and why the KERP is so

9 crucial. Of that 43, 41 were store and pharmacy managers.

10 That's nearly 20 percent of the people we were trying to

11 protect, and two were in the Irvine central office.

12 There will be no change to the KERP in terms of actual

13 magnitude, Your Honor, because each of these are positions, and

14 for everyone that resigns, we need to enact a battlefield

15 promotion, and they will become the store manager who then will

16 be entitled to the KERP.

17 In addition, to accommodate the request of the UCC and

18 the union to delay the commencement of the GOB, the KERP

19 eligibility period will be extended to the store closing, which

20 is now November 30th.

21 Tellingly, only the union objects to the KERP. After

22 review of the facts and consultation with the debtor and its

23 advisors, neither the DIP lenders, nor the UCC have objected.

24 And that's a UCC that includes the union as a member. The

25 union has three basic objections:


93

1 One is the KERP isn't fair to the rank-and-file

2 because the rank-and-file aren't even getting paid for their

3 paid time off. And the debtors were very sensitive to this

4 issue.

5 The Court will recall, in the first-day wage motion,

6 the debtors requested authority to pay all the PTO, and for

7 various reasons, that couldn't happen at that time. But as we

8 told you earlier, as part of the DIP negotiation and the

9 amendment of the wage order, that P -- up to $15 million of PTO

10 is going to be paid, so the employee -- rank-and-file employees

11 that, at the end of their service, unfortunately, if that

12 happens, will receive their accrued PTO. So there's some

13 equality there.

14 Two, some of the key employees have titles like

15 director or vice president, and because of that, the union

16 argues that they're insiders of the debtor, and because they're

17 insiders, the KERP goes into the restrictions of 503(c)(1).

18 But Courts like Foothills and Borders make very clear that you

19 don't look at "insider" specifically as the definition, you

20 look at it functionally. So, if the title of someone is

21 president, but they really just run the gas station, they're

22 not really the president.

23 And here, in the case of store directors, these are

24 not people that were appointed by the board, they don't have

25 authority to set store policy, they don't have any authority to


94

1 get rid of store assets other than in the ordinary course of

2 business, and they have very limited roles and authority. They

3 are not the types of insiders that 503(c)(1) was attempted to

4 get. Moreover, approximately 90 percent of the key employees

5 are store or pharmacy managers. These are just not what we're

6 trying to capture in 503(c)(1).

7 And the final objection is really process-oriented,

8 and that is: Did the debtor consider all the factors they

9 should have and undertaken all of the necessary steps when they

10 set up the KERP. To answer that question, we need to go back

11 to the two declarations, and we need to look at the appropriate

12 standard.

13 And it's pretty clear that, in this Court, in Global

14 Home Products, held that the 503(c)(3) inquiry is no different

15 than the business judgment standard under 363(b). And in

16 considering the inquiry, the Court should look at factors such

17 as whether the plan is calculated to achieve its desired

18 performance, whether the costs are reasonable, whether the plan

19 is consistent with industry standards, whether the debtor

20 engaged in due diligence related to the need for the plan or

21 what employees were covered by the plan and what types of plans

22 were generally available, and whether the debtor received

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